Police Minister Mike Gallacher steps down after ICAC hears he was in 'corrupt scheme' with Nathan Tinkler

Michaela Whitbourn, Kate McClymont

Mike Gallacher at a police parade in Goulburn this morning. Photo: Darryl Fernance

NSW Police Minister Mike Gallacher has resigned from cabinet after a corruption inquiry heard he hatched a "corrupt scheme" with Nathan Tinkler's property development group to receive illegal donations.

In a development that sent shockwaves through the Baird government, the Independent Commission Against Corruption heard on Friday that Mr Gallacher was intimately involved in setting up a scheme for Buildev to pay tens of thousands of dollars in illegal donations to a Liberal Party slush fund.

Premier Mike Baird said in a statement that he had accepted Mr Gallacher's resignation from the ministry.

"I make no judgement regarding those allegations. However, it could take considerable time for them to be resolved, and this would constitute an unacceptable distraction for my government," Mr Baird said.

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"We need to be completely focussed on delivering results for the community."

The inquiry was shown June 2010 emails in which Buildev executives Darren Williams and David Sharpe discussed which company should be used to funnel the illegal donations into the slush fund, a "sham business" called Eightbyfive set up by a staffer to former Liberal minister Chris Hartcher.

"You know that you can go to jail for giving false evidence," threatened Mr Watson. "This is your big chance, Mr Williams, to give this an innocent complexion."

When Mr Williams said he "honestly" could not recall the contents of an email about the Eightbyfive scheme, Mr Watson suggested that the ICAC had information which might help him.

He then sensationally put to Mr Williams: "The truth is you had a close, long-standing personal connection with the [then] shadow minister, Mike Gallacher, it was through him that the two of you hatched a corrupt scheme to make donations to the Liberal Party using the Eightbyfive business, correct?"

"No," Mr Williams said.

"By the end of this you are going to regret giving that answer," Mr Watson said.

Mr Watson said the shocking new evidence had come to light at midday on Thursday and an adjournment might be required because the "serious matters" warranted further investigation.

"We don't go off half-cocked. We don't put something as serious to you as this without knowing plenty of stuff," he told Mr Williams.

Operation Spicer, the inquiry into Liberal Party slush funds, started public hearings on Monday and had been slated to run for up to four weeks.

The inquiry has previously heard Mr Hartcher did favours "repeatedly" for Buildev, which paid $66,000 into the Eightbyfive slush fund.